Can a surviving spouse claim their deceased spouse’s super while being executor of their estate?

The recent case of Burgess v Burgess [2018] WASC 279 (‘Burgess’) continues a line of cases that consider the conflict that arises where a person acts as executor of a deceased estate while also receiving superannuation death benefits in their personal capacity.

Broadly, Burgess
and the following cases revolve around the executor/administrator’s
duty to collect assets of the deceased on behalf of an estate. As a
fiduciary role, an executor/administrator must not, without proper
authorisation, allow their personal interests to conflict with their
obligations owed to the estate.

These cases are sure to have an
increasing impact on death and succession planning in an SMSF context as
around 70% of SMSFs are two-member funds and, in relation to couples,
each spouse typically appoints their spouse as executor of their estate.
Accordingly, many surviving spouses may thrust into a position of
potential conflict in relation to their duties as an SMSF
trustee\director and as an executor.

McIntosh v McIntosh – Where an administrator was found to be conflicted

McIntosh v McIntosh [2014] QSC 99 (‘McIntosh’)
involved a mother who was appointed as the administrator of her
deceased son’s estate. While acting in that role, the mother also
applied to three of her son’s industry/retail super funds to receive his
death benefits in her personal capacity, which she received. If these
death benefits had instead been paid to the estate they would have been
distributed equally between her and her former husband (as the deceased
parents) under the laws of intestacy in Queensland as their son died
without a will.

After
some legal posturing between the mother’s and the father’s lawyers, the
mother filed an application in the Queensland Supreme Court to determine
the matter which found:

…
there was a clear conflict of duty … contrary to her fiduciary duties as
administrator. When the mother made application to each of the
superannuation funds for the moneys to be paid to her personally rather
than to the estate, she was preferring her own interests to her duty as
legal personal representative to make an application for the funds to be
paid to her as legal personal representative. She was in a situation of
conflict which she resolved in favour of her own interests. As such she
acted … in breach of her fiduciary duty as administrator of the estate …

Accordingly,
the mother was required to account to the estate for the super benefits
she had personally received. Also of note was in this case was the fact
that the mother was a nominated beneficiary in respect of each of the
super funds via non-binding nominations. Had binding death benefit
nominations (‘BDBNs’) been in place, no conflict would have arisen. For
further analysis of this case click here.

Brine v Carter – executor was held not to be conflicted

Brine v Carter [2015]
SASC 205 examined a potential conflict arising in the case of an
executor which did not require the executor to account to the estate.
Professor Brine had appointed his three children and Ms Carter, his de
facto spouse, as the executors of his estate. Professor Brine had two
super accounts/pensions in the same industry super fund. As one pension
had no residual value and could only be paid to his surviving spouse,
the dispute related to the remaining pension, which could be paid to a
dependant or the legal personal representative (deceased estate).
Professor Brine had completed a non-binding death benefit nomination in
favour of his legal personal representative to receive this pension
amount.

Ms Carter applied to the super fund trustee to receive the benefits in both accounts in her personal capacity.

Ms
Carter had previously represented to the other three executors on
multiple occasions that the estate was not an eligible beneficiary of
the super benefits. However, after making their own enquiries, the
deceased’s three children found out that they could claim the death
benefit on behalf of the estate and proceeded with this claim.

The
super fund trustee then exercised its discretion to pay both pension
benefits to Ms Carter and the remaining executors formally disputed this
decision. Due to her conflict, Ms Carter recused herself from any
discussions or actions relating to the dispute notice issued to the fund
trustee by the executors and did not object to it but remained an
executor. Ms Carter in fact made further submissions to the trustee in
her personal capacity claiming the benefits.

After the super fund
trustee affirmed its decision and other dispute processes provided no
further recourse, the remaining executors applied to the South
Australian Supreme Court for an order that Ms Carter account to the
estate for these benefits. The court found that:

Ms Carter was in a position of conflict regarding her duties as an executor.

Ms
Carter’s appointment as an executor via the deceased’s will, while
providing some acknowledgement by the deceased of a conflict, was not by
itself sufficient to overcome her position of conflict. Rather, a
specific conflict authorisation was required.

As the other
executors claimed the super benefits on behalf of the estate and had
full knowledge about their rights prior to the super fund trustee’s
decision, they effectively consented to Ms Carter claiming the benefits
in her personal capacity despite her conflict. From that point,
Ms Carter did not act in breach of her duty as an executor as there was
no connection between her breach and the benefit she received.

Ms Carter was not required to account to the estate.

Brine v Carter
provides a particular set of facts that resulted in a somewhat
incongruous outcome that allowed an executor to apply for and receive
death benefits in her personal capacity despite a potential conflict
arising. The court noted that had the other executors not been aware of
Ms Carter’s application, and had they also not made an application on
behalf of the estate, Ms Carter would have been liable to account to the
estate. This outcome was therefore due to the particular facts in this
case. In many other factual scenarios, the conflict could easily have
resulted in the spouse having to account to the estate.

Burgess v Burgess – sacred trustee obligations

In Burgess v Burgess
[2018] WASC 279 Mr Burgess died without leaving a will in May 2015 and
was survived by his wife and two minor children. A year after his death,
Mrs Burgess applied to become administrator of his estate and was
appointed on 27 June 2016.

Mr Burgess had super benefits in four
large public offer funds and Mrs Burgess made a claim to two of those
funds to be paid her deceased husband’s death benefits. She applied for
and received benefits from one fund prior to her appointment as
administrator and applied for and received benefits from another fund
after her appointment.

Mr Burgess’ estate (including any super
paid to the estate) would be split among Mrs Burgess and their two young
children. By the time of hearing, one super fund had paid benefits to
the estate. The fourth fund had not yet made any payment and Mrs Burgess
had not made any application to it. Further, there were no BDBNs in
place in relation to any of the funds.

Due to the uncertainties,
Mrs Burgess herself made an application to the Western Australian
Supreme Court. Ultimately, the court followed the principles in McIntosh and found that:

Mrs
Burgess would retain the benefits from the first super fund, as she was
not an administrator at the time of application and thus no conflict
had arisen in relation to the first fund.

Mrs Burgess was
required to account to the estate for the benefits applied for and
received after she was appointed. There was a conflict of interest and
as administrator she was bound to claim the benefits on behalf of the
estate after she was appointed administrator.

Mrs Burgess was bound to claim the remaining super benefits on behalf of the estate.

In an age of increasing
moral ambivalence in western society the rigour of a court of equity
must endure. It will not be shaken as regards what is a sacred obligation of total and uncompromised fidelity required of a trustee.
Here, that required the administrator not just to disclose the
existence of the (rival) estate interest when claiming the
superannuation moneys in her own right from the fund trustee. It
required more. It required her to apply as administrator of the estate
for it to receive the funds in any exercise of the fund trustee’s
discretion. [Emphasis added]

Martin J gave the following comments at para [85] regarding the fiduciary duties of an executor:

The
interests of a deceased estate require a ‘champion’ who cannot be seen
(even if they are not) to be acting half-heartedly, or with an eye to
achieving outcomes other than an outcome that thoroughly advances the
interests of the estate – to the exclusion of other claimants.

Martin
J made the point that the undesirable outcome in this case might have
been avoided had Mr Burgess made a will that explicitly contained a
conflict authorisation or if he had signed BDBNs in relation to his
super benefits. In lamenting the outcome Martin J at para [91] stated:

The
result is, of course, messy for the family and less clear cut than
might otherwise have been desired. However, that is a result of wider
trustee integrity policy principles of the law which take effect and
prevail. They are of vital importance and are applicable to universal
circumstances extending well beyond the present rather regrettable
factual situation. The present is a situation, I reiterate, that might
have been avoided by the two measures I earlier mentioned.

Other important cases

In the case of Re Narumon [2018]
QSC 185 the court considered whether attorneys under an enduring power
of attorney (‘EPoA’) could validly execute both a BDBN
confirmation/extension as well as a new BDBN on behalf of a member.
Whether an attorney will have such power will depend on the SMSF
governing rules, the EPoA document, the relevant powers of attorney
legislation in the applicable state/territory and the federal
superannuation legislation.

In Re Narumon the member (Mr
Giles) became incapacitated and his attorneys under an EPoA, his wife
(Mrs Giles) and his sister (Mrs Keenan), purported to both extend a
prior lapsed BDBN and to execute a new BDBN, both of which provided for
death benefits to be paid to them. The EPoA document did not expressly
authorise the attorneys to enter into a conflict transaction. The Court
found that the extension of the prior BDBN was valid since:

the
fund’s governing rules allowed the prior BDBN to be confirmed and
provided that any power or right of a member could be exercised by an
attorney;

while the EPoA document did not expressly deal with
superannuation matters, the meaning of ‘financial matters’ in the
relevant (Queensland) legislation was wide enough to cover
superannuation; and

while a ‘conflict transaction’ entered into
by an attorney can invalidate a transaction, the confirmation of the
prior BDBN was not a conflict transaction. While the BDBN benefited the
attorneys it was found not to amount to a conflict as it simply ensured
the continuity of Mr Giles’ prior wishes.

However, the new
BDBN executed by Mrs Giles and Mrs Keenan was found to be a conflict
transaction as it provided for a different payment of death benefits
which slightly benefited Mrs Giles more than the extended BDBN. Thus,
the new BDBN was invalid. For a detailed analysis of this case and its
lessons click here.

In the case of Re Marsella; Marsella v Wareham (No 2)
[2019] VSC 65 the deceased’s daughter, who was also a co-trustee, was
ordered to repay death benefits back to the fund and was removed as a
trustee along with her co-trustee husband for acting ‘grotesquely
unreasonable’ in conflict of her trustee duties and in bad faith. This
case explores the high legal standards placed on SMSF trustees and
highlights the need for careful attention to SMSF succession planning.
For a detailed analysis of this case and its lessons click here.

SMSFs

It
is important to consider the impact of these cases from an SMSF
perspective as it is typical for the spouse of a deceased SMSF member to
also be an executor or administrator of that member’s estate. In such a
situation, a potential and real conflict may arise between the
executor/administrator’s obligations as trustee of the estate and their
desire to receive superannuation death benefits in their personal
capacity.

These cases reiterate the importance of planning for
death and SMSF succession. In all cases, the conflict difficulties would
likely have been avoided had the deceased had a will with appropriate
conflict authorisations and/or BDBNs were in place to remove the
trustee’s discretion as to whom death benefits could be paid.

In
any super death benefits matter, advisers and trustees should ensure
that applications to receive benefits are not made without first
considering, among other things, the possible conflict implications.
Moreover, advisers should recommend that their clients proactively
implement SMSF succession and death benefit strategies that ensures the
surviving spouse is not placed in a position of conflict that could
undermine their ability to receive their spouse’s death benefits. This
might involve special provisions in wills, EPoAs, BDBNs, death benefit
deeds and other legal documents.

Conclusion

This
line of cases illustrates that the courts treat the fiduciary duties of
an executor/administrator in a strict and ‘sacred’ manner. Further, the
courts will uphold these obligations despite what might be seen as a
strict and inflexible approach resulting in an ‘unfair’ outcome.

DBA Lawyers is well placed to advise and document succession strategies to overcome these risks. We offer, among other services: